DRH

'Wars and Rumors of Wars' - Time to Look at Defense Stocks

As an employee of on of the defense companies you mention, I'd like to add a few comments and possibly correct a few misconceptions:

1) Trying to anticipate war is no reason to be buying defense stocks. They will go up if the US suddenly gets involved in a conflict, but this is only because of the speculators. Enough people have the same misinformed point of view that it actually creates demand in the stocks. See #2 below.

2) The most profitable time for defense stocks is NOT when we go to war, it is when we are in sort of a cold-war mindset and do not have significant numbers of troops engaged anywhere. If we suddenly decide to send troops somewhere, then this takes up resources. When you need money to fund day-to-day troop operations, your not going to spend money developing the next generation aircraft carrier, fighter jet, or submarine. I remember right after 9/11 a lot of the programs we had got shut down because money had to be used to fund troops on the ground.

3) During times of war, the only companies that benefit are the ones that make the supplies troops need on a day-to-day basis, or ones that have some emerging technology that the military thinks could be a 'game-changer'. The larger companies don't see any added benefit.

4) Defense contracts can often span 5 years of more. So in many cases the work that will be performed while Obama is in office has already been negotiated by the Bush administration. It may be several years before the new administration gets a chance to increase/decrease funding levels. In these cases, going to war is the worst thing for the industry. No significant new contracts are awarded, and the funding we already have is put in jeapardy.